Question

In: Finance

(1)   Gap analysis is used to measure the direct effect of interest rate changes on bank...

(1)   Gap analysis is used to measure the direct effect of interest rate changes on bank earnings. Suppose that the interest rate has risen. If the amount of variable-rate assets of a bank is greater than the amount of variable-rate liabilities, will the net earnings of the bank increase or decrease?
If the amount of variable-rate liabilities of a bank is greater than the amount of variable-rate assets, will the net earnings of the bank increase or decrease?
(2)   Explain the duration of a security.
(3)   How is the duration of a security different from the maturity of a security?   

Solutions

Expert Solution

1. The earning of bank will INCREASE. The increase of the earning of bank will be due to higher amount of variable rate assets than the variable rate liabilities because the bank will be able to collect higher amount of interest than, repayment of interest.

The net earning of the bank is going to decrease if there will be a higher amount of variable rate liabilities because the bank will have a higher amount of short term repayment obligation in form of interest.

2. duration of a security is related to the volatility of the security in respect to the interest rate changes. it will be reflecting the sensitivity of the change in the acid pressure due to change in the interest rates.

3. Maturity of a security is related to the overall time in which the security is going to expire but duration of a security is related to calculation of the sensitivity of security prices in respect to interest rate changes.

jeff jeffy answered 2 years ago
Next > < Previous

Related Solutions

Compare and contrast income gap and duration gap analysis as techniques for management of interest rate...
Compare and contrast income gap and duration gap analysis as techniques for management of interest rate risk by banks.
1a. Discuss the effect of change in interest rate by the central bank to the economy....
1a. Discuss the effect of change in interest rate by the central bank to the economy. b. Explain the effect of protectionism policy on country economy growth. c. Discuss with example how the standard of living in a developing country might be improved.
Suppose that changes in nominal interest rate have a negligible effect on velocity of money. Then,...
Suppose that changes in nominal interest rate have a negligible effect on velocity of money. Then, if risk premium of a country increases, what happens to consumption, investment and net exports in short run? How does price level change from short run to new long run? Explain.
You are asked to analyze the effect of the Bank of Canada's new interest rate policy...
You are asked to analyze the effect of the Bank of Canada's new interest rate policy on housing prices. Using a comparative static experiment, describe the steps you need to follow to produce a sound theoretical macroeconomic analysis.
If a bank has a ___________ gap, its net interest margin will be __________ affected by...
If a bank has a ___________ gap, its net interest margin will be __________ affected by an increase in interest rates -negative, positive -negative, adversely -positive, adversely -zero positive the duration of a zero-coupon bond will be _______ the duration of a couple bond with the same yield, maturity and other characteristics. - lower than - higher than -equal to -more information is needed
If a bank is characterized by a positive income gap and interest rates rise, what will...
If a bank is characterized by a positive income gap and interest rates rise, what will happen? What will happen if the bank is characterized by a negative income gap and interest rates rise? How would your answer to these questions change if we assumed that interest rates were falling? How can banks insulate themselves from the threat posed by volatile interest rates on bank income?
The following problem has you examine the impact of interest rate changes on bank profits using...
The following problem has you examine the impact of interest rate changes on bank profits using basic gap analysis. Assume that the amount of variable- and fixed-rate assets and liabilities is fixed over the next year. In other words, no assets or liabilities will mature during this period. For each part, be sure to give a numerical answer. Suppose a bank has $70M in variable-rate assets and $120M in variable-rate liabilities. What is the impact on the bank’s profits of...
True or False: Regression analysis is used for prediction, while correlation analysis is used to measure...
True or False: Regression analysis is used for prediction, while correlation analysis is used to measure the strength of the association between two numerical variables. A. True B. False In performing a regression analysis involving two numerical variables, we are assuming A. the variances of X and Y are equal. B. the variation around the line of regression is the same for each X value. C. that X and Y are independent. D. All of these. Which of the following...
1. Carefully define the unemployment rate. How is the unemployment rate used to measure the economy’s...
1. Carefully define the unemployment rate. How is the unemployment rate used to measure the economy’s performance? What flaws and/or pitfalls are there in the measure?
1. Carefully define the unemployment rate. How is the unemployment rate used to measure the economy’s...
1. Carefully define the unemployment rate. How is the unemployment rate used to measure the economy’s performance? What flaws and/or pitfalls are there in the measure?
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT